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Inflation is Inevitably Affecting the Global Supply Chain System: The Good, The Bad, and The Ugly

The prevalence of global inflation, at least over the course of the past year, has been significantly on the rise. In fact, according to the International Monetary Fund (IMF), inflation rates around the world have recently reached an average of 8.7 percent. In many countries, the rates are even higher and inflation rates are projected to be as high as 68% in Turkey, 58% in Argentina, and remarkably high in other parts of the world.

There are likely many underlying causes of global inflation, including increased government spending throughout the “COVID Era” (which might not even be over, yet), rising energy prices and loose monetary policies by the world’s central banks and several others. Most economists have been forecasting an early 2020s inflation boom for at least the past two years.

Undeniably, the existence of global inflation has directly affected international supply chains and is also partly a result of COVID-related distortions of these supply chains. And almost every individual component of these chains has been affected. Compared to where the global economy stood just two years ago, it now costs quite a bit more to acquire raw materials, manufacture goods, and—perhaps most notably—ship these goods to other parts of the world. Pandemic-related disruptions have also created a misallocation of shipping containers, pushing up the transport price.

As expected, the recent explosion in global inflation has made it much harder for many companies to operate. The prevalence of corporate insolvency has been notably on the rise globally. Firms, in general, are having a much more difficult time paying their previously agreed-upon debts in full and on time. If inflation continues to increase, the widespread existence of firm-specific insolvency will be likely to continue.

Of course, even the very near future of the global economy will always be difficult to forecast—listening to many of the world’s leading economists and flipping a coin will often yield the same results. Nevertheless, any firm that is directly reliant on the global supply chain system (as most are) will need to consider the various possible scenarios that are likely to emerge. Let’s take a look at the best-case, worst-case, and most likely scenarios that will affect the global economy throughout the rest of 2022.

Best-Case Scenario

In order for the “best case” scenario to actually unfold, there are a lot of things that will need to change. Perhaps most notably, inflation will be a factor that needs to get under control, not just in the United States and the United Kingdom, but all across the world.

Whether inflation will actually be reined in is something that remains yet to be seen. Many of the world’s emerging markets—including Ethiopia, Yemen, Afghanistan, and others—are particularly at risk. Stronger markets, such as China, Japan, and Switzerland are less likely to be affected. Regardless, because the world’s supply chain system is so interconnected, inflation should be considered a global concern.

There are quite a few changes that, at least in the best-case scenario, could reverse the global inflation trends. An ending to the Russian-Ukrainian conflict, for example, would open up many of the world’s most important trade routes and also considerably expand access to some of the world’s most-needed resources, such as petroleum, gas, wheat, rare-earth minerals, and more. But the ending of the brutal conflict between these two nations isn’t all that needs to happen. Other changes that could potentially relax global inflation include changes in central banks’ interest rate policies, increased access to energy resources, and the general opening of international supply chains.

Worst-Case Scenario

At least for the near-term future, the worst-case scenario for global supply chains would likely involve an additional—perhaps even more dramatic—spread of the COVID-19 virus. And if other diseases become widespread enough, then tensions on global supply chains will likely increase even further.

The ongoing existence of a virus will, undoubtedly, make it more difficult for manufacturers to (safely) access the laborers they need, create general shortages, and also significantly increase the time it takes to make and ship goods from one country to another. But the virus isn’t the only factor that is currently threatening global supply chains: a myriad of geopolitical challenges is hindering the global economy, as well.

While Russia and Ukraine, collectively, only account for about 2 percent of the global economy, the resource-richness and geographical significance of these two nations seem to have created an outsized effect. Other geopolitical flash points—including issues between China and Taiwan, Saudi Arabia, and Yemen, and, generally speaking, “The West” and “The East”—have also limited global economic potential. If any of these conflicts escalate further, anyone involved in the global shipping industry should expect setbacks.

Most Likely Scenario

As is typically the case, the most likely scenario—the so-called “ugly” scenario—that can be anticipated this year will be somewhere between the best-case and the worst-case forecasts. In other words, global supply chain analysts should probably anticipate many of these most damaging variables to proliferate but it might be a little bit too ambitious to forecast a third world war or any other comparably extreme situation.

It seems likely that many of the world’s most important financial institutions will continue to take action to keep inflation under control. In the United States, the Federal Reserve—“dually mandated” to simultaneously combat both inflation and unemployment—will likely continue to raise interest rates, subsequently limiting the money supply and increasing the spending power of the American Dollar (the world’s most important currency). Other institutions, such as the Bank of England and the European Central Bank, will likely take similar actions.

There is no denying that the effects of global inflation will probably continue for at least the next year. But there are also many indications that some of the most damaging components of the current situation (with global inflation at 8.7%) will begin to gradually subside. For the world’s suppliers and other supply chain participants, there is likely some relief on the horizon.

Theo Smid, Senior Economist, Atradius
Theo Smid, Senior Economist, Atradius

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